American International Group, Inc. (AIG) described itself as the "leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed in the U.S. on the New York Stock Exchange as well as the stock exchanges in London, Paris, Switzerland and Tokyo," its website states. [1]

This article is part of the Center for Media and Democracy's investigation of Pete Peterson's Campaign to "Fix the Debt." Please visit our main SourceWatch page on Fix the Debt.

About Fix the Debt

The Campaign to Fix the Debt is the latest incarnation of a decades-long effort by former Nixon man turned Wall Street billionaire Pete Peterson to slash earned benefit programs such as Social Security and Medicare under the guise of fixing the nation's "debt problem." Through a special report and new interactive wiki resource, the Center for Media and Democracy -- in partnership with the Nation magazine -- exposes the funding, the leaders, the partner groups, and the phony state "chapters" of this astroturf supergroup. Learn more at PetersonPyramid.org and in the Nation magazine.

Financial crisis and the bailout

In the September 2008 financial crisis AIG suffered a liquidity crisis[2]. On September 16, 2008, the Federal Reserve exchanged a warrant for the purchase of 79.9% of AIG stock for an $85 billion line of credit[3]. In May 2009, the government increased available support by as much as $70 billion, plus a $60 billion credit line and $52.5 billion to buy mortgage-based assets owned or guaranteed by AIG, increasing the total amount available to as much as $182.5 billion[4].

Later it came to light that $90 billion of the money provided to AIG by the government went directly to banks, including non-American banks, including Goldman Sachs ($12.9 billion), France's Societe Generale ($11.9 billion), Germany's Deutsche Bank ($11.8 billion), and Britain's Barclays PLC ($8.5 billion)[5]. The bailout of AIG was largely a bailout of the banks and others that had made credit default swap bets with AIG, including Goldman Sachs.

Contribution to the crisis

AIG had taken on 440 billions of dollars in credit default swaps (CDS) with little or no reserves with which to make good on their liabilities. Along with having insufficient reserves the company had not protected itself by being on "both sides" of the CDS transaction, as other companies did, it only sold them.[6] When the real estate prices began to fall, leading to the "mortgage meltdown," AIG was unprotected and owed the entire amount. The amounts owed to other banks inside and outside of the United States was sufficient to bring the entire world financial system into default. Bond CDS obligations totalled $440 billion[7], $80 billion in mortgage-backed securities[8].

Bailout amounts

Bailout pass-throughs

In the months leading up to its public collapse in September 2008, AIG tasked Elias Habayed, chief financial officer for the AIG division that oversaw AIG Financial Products (the unit that had sold the swaps to the banks), to attempt to negotiate with the banks to accept 60 cents on the dollar, but that plan was scuttled when the Federal Reserve Bank of New York opened an $85 billion credit line for AIG and bought 77.9 percent of the company.[9] The government's financial stake in and control of AIG increased from that point: "The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion."[9]Timothy Geithner, then president of the Federal Reserve Bank of New York, took over Habayed's negotiations, and the effort to negotiate down AIG's obligations to its counterparties was supplanted with a plan to pay 100 percent of those obligations: "Geithner's team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps.... Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar."[9]

When Bloomberg reported in October 2009 the change in approach directed by Geithner, "[l]awmakers and financial analysts critical of the payouts say it amounted to a back-door bailout for big banks," while unnamed Fed officials defended the practice in the pages of the Washington Post by arguing that AIG lost its ability to demand concessions because the government takeover removed the threat of impending bankruptcy.[10]

On November 17, 2009, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released a report[11] saying that Timothy Geithner -- then the head of the Federal Reserve Bank of New York and now the nation's Treasury Secretary -- was responsible for billions of tax dollars in overpayments to major Wall Street firms, most notably Goldman Sachs.

From the report,

[T]he refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely "voluntary," made the possibility of obtaining concessions from those counterparties extremely remote.

Revolving door influence

Ties to financial regulators

Profits, bonuses and market value

Executive compensation

As a TARP recipient, AIG's executive compensation came under the purview of Treasury special master for compensation Kenneth R. Feinberg. According to The New York Times', "A.I.G. refused to cancel some pay contracts that fell outside Mr. Feinberg’s purview. At one point, A.I.G. executives expressed frustration with the contracts. A.I.G., they said, was having trouble identifying just who its most highly paid employees were. "[15]

Earnings and bonuses

In March, 2009, AIG paid "retention bonuses" of $165 million, causing a public uproar. Executives promised to return approx. $45 billion of these, but by December, 2009, only $19 billion had been returned.[16]